Transportation funding - a simple breakdown of how money comes in and goes out

TAM logoDon’t spend more money than you bring in. That’s a mantra many of our parents and grandparents lived by and tried to pass down to generations to come. And that’s how the Iowa DOT operates. The Iowa DOT works on a “pay-as-you-go” basis, meaning we don’t borrow money for transportation projects. As part of our blog series on transportation asset management, we’re going to give you a brief glimpse into the complicated world of the Iowa DOT’s transportation funding.

When we talk about transportation funding, we will focus on the state’s portion of the system, which includes the interstates, numbered U.S. and Iowa highways, and approximately 4,000 bridges (collectively known as the Primary Road System). As was indicated in an earlier blog post, this is a relatively small part of the system in terms of total mileage, but is the backbone of the system, as it carries a large portion of all traffic through Iowa.

How the money comes in
Funding for Iowa’s transportation-related investments can generally be categorized into two areas: state or federal funds. State funding available to the Iowa DOT primarily comes from the Primary Road Fund (PRF), which is a subset of the Road Use Tax Fund (RUTF), and the TIME-21 Fund. The RUTF‘s major sources of revenue are derived from taxes on motor fuel, registration fees, and fees for new registrations. The TIME-21 Fund is funded primarily through registration fees. The chart below breaks down state revenues, by source, for state fiscal year 2016. Chart 1

The federal government also collects funding for transportation and disperses those funds to states through its Highway Trust Fund. The Highway Trust Fund is primarily funded through a tax on motor fuels. Federal tax rates on gasoline and diesel are currently set at 18.4 and 24.4 cents per gallon, respectively. In addition to the tax on motor fuel, the Highway Trust Fund also receives money through fees on the sale of tires over 40 pounds, trucks over 33,000 pounds gross vehicle weight, and trailers over 26,000 pounds gross vehicle weight, as well as an annual tax on heavy vehicle use.

In state fiscal year 2016, it is estimated that a total of nearly $767 million in revenue will be available for programming projects in the Iowa Transportation Improvement Program (Five-Year Program). The three funding sources are presented below. Chart 2

How the money goes out

State and federal funds are utilized for transportation improvements included in the Five-Year Program. While the Program lays out goals to accomplish for five years, each year it is reviewed and adjusted to assure it is most effectively meeting Iowa’s transportation needs. The largest component of the Five-Year Program is the Highway Program.

Iowa Code is very specific on where funds can be spent. For example, any money in the Primary Road Fund must, by law, be spent on the state’s Primary Road System. Additional restrictions exist that can remove flexibility from how the Iowa DOT targets its investments.

Federal aid is distributed to states through various programs. Each program is allocated different amounts and has their own eligibility requirements. The Iowa DOT utilizes a portion of these funds for state initiatives and the remainder is distributed to cities, counties, and other sponsors through grant programs and awards.

All of the above information is focused on how the Iowa DOT manages the funding for investment in the Primary Highway System. Iowa’s counties and cities manage the local road and street systems using some of the same funding sources used by the Iowa DOT. They also use local funds (often property tax revenue) and other sources of revenue, including some borrowing when it makes sense.

In an upcoming blog, we will discuss the investment strategies that are used to prepare the Highway Program.

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